Asset Protection Introduction. The Wealth Preservation Institute 139 N. Whittaker New Buffalo, MI

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1 Asset Protection Introduction The Wealth Preservation Institute 139 N. Whittaker New Buffalo, MI

2 Are your clients asset protection plans put together? Help your clients complete the asset protection puzzle

3 Asset Protection as a client gathering tool Most clients with wealth are not asset protected. All physicians and most other professionals (CPAs, attorneys, financial planners (CFPs), insurance agents) are also worried about asset protection because of personal lawsuits. Many advisors are not asset protection guru s (even though they know very little about the topic and pitch junk to clients). If you can deal with the topic in a credible manner and in a manner that is easy for the client to understand, the topic will be a great client gathering tool.

4 Asset Protection Makes Friends When you can show a client why their assets are not protected and; Show them what the devastating financial consequences of not being asset protection can be and; Show them how simple it is to fix the problem with your help; YOU WILL MAKE FRIENDS OF YOUR CLIENTS WHO WILL LOOK TO YOU FOR OTHER INCOME GENERATING BUSINESS.

5 Don t let your clients Put all their Eggs in One Basket Multiple Entity Approach Debt shields Segregation techniques AR Real Estate Valuable Equipment

6 Personal Protection Tools By Law Homestead Life Insurance, Annuities Wage account By Action FLPs/LLCs Offshore Irrevocable trusts Debt shields

7 What is Asset Protection Planning? Asset protection is simply helping clients protect their wealth from creditors that arise from negligent actions of our clients. Asset protection is helping client avoid paying too much in taxes (estate and income). Asset protection is helping people avoid losing money from downturns in the stock market. The material in asset protection modules I, II and III will focus on protecting assets from creditors. A good portion of the rest of the CWPP course will focus on the how to protect assets from the IRS and from downturns in the stock market.

8 What is good asset protection planning? Good asset protection: is NOT about hiding assets. uses existing laws to put up barriers in front of creditors to discourage creditors from attacking personal assets. is legal. can be complicated or simple. can be expensive or not. can be domestic or offshore. Good asset protection CAN NOT prevent lawsuits. The majority of claims filed against physicians are without merit. Anyone can be sued for anything (although the claim might get dismissed, a defendant still has to deal with it).

9 Who needs asset protection? Anyone with Money (the simple answer). High income/net worth clients Anyone who can not hide behind the asset protection of a corporation. Physicians Attorneys CPAs/accountants, EAs Financial Planners Stock Brokers Insurance agents Architects Even if a professional is acting as an employee of a company, he/she can not hide behind the limited liability of the company and can be sued personally. Therefore, if you are in one of the above listed fields, you too need asset protection.

10 Reasons non-professionals need asset protection If your clients have or own the following, they have asset protection problems: Residence. Teenage children. Boat, automobile, waverunner, snowmobile (protect the estate from the asset not the asset from creditors) Vacation rental. Why? Slip and fall at the home, bad handrail, party at the house and someone drives home drunk and gets into an accident. Teenage children who have parties when parents are away (The parent is liable when a friend drive home drunk and is injured). Negligent driving (drunk driving). Defective condition of the property and the owner has a higher duty to take care of the property.

11 What assets should be protected? Family Home or Condominium Rental Property Non-Rental Property IRAs Stocks or Mutual Funds Life Insurance Bank Account or CD s Planes, Boats, Automobiles, Wave runners or Motorcycles Other business entity (especially S or C-Corp stock) Collectible items that have significant value Accounts Receivables (at the medical practice) * Other personal real property of value Future Inheritance for Family

12 Corporate Entities Sole proprietorships (2 nd worst) Partnerships (worst) C-Corporations (not great) S-Corporations (not great LLCs (tool of choice domestically) FLPs/LPs (tool of choice domestically)

13 Difference for Asset Protection The Charging Order The Charging Order. A charging order is the only remedy a court of law can award a creditor who is trying to get (obtain) the assets of a debtor when the assets are in an LLC (or limited partnership).* A charging order DOES NOT allow creditors to sell assets of the LLC, or to force distributions of income. *This assumes the LLC or FLP is setup in a state with a statute that states a charging order is the sole remedy. (Always check your state statute to make sure there have been no changes in the law) *This assumes the LLC or FLP is a multi-member entity.

14 Example Patient Lucky sues for malpractice and obtains a judgment against Dr. Smith for $3,000,000. Dr. Smith has $1,000,000 worth of medical malpractice coverage and has all the rest of his major personal assets owned by an LLC of which he owns 95% and his spouse owns 5%. Lucky asks the court for satisfaction and asks the court to have Dr. Smith turn over the assets in his LLC to him. The court tells Lucky that the only remedy the court can give to him is a charging order.

15 What a creditor cannot get with a charging order 1) A charging order does not transfer the interest in the LLC to the creditor or force the debtor to sell his/her interest and turn over the sale proceeds to the creditor. 2) A creditor cannot force the LLC to sell assets. 3) A creditor cannot force an LLC to distribute income

16 What does a creditor get with a charging order? The right to pay income taxes on income generated in the LLC but NOT distributed. There was a revenue ruling issued in 1977 (77-173) which states that a creditor (patient) who obtains a charging order can be treated as a partner for federal income tax purposes.

17 Example Using the example with Lucky who has a $3,000,000 judgment against Dr. Smith. Assume that Lucky obtained a charging order against Dr. Smith s LLC, which owns Dr. Smith s $1,000,000 brokerage account and $1,000,000 vacation home in Florida. Further assume that the LLC earns dividend income of $25,000 a year from the brokerage account and rental income from the vacation home of $20,000 a year. Normally, Dr. Smith takes the combined $45,000 as income from the LLC and spends it as he sees fit.

18 Continued When Lucky obtains the charging order, Dr. Smith decides not to take any of the $45,000 out as income and instead leaves the income in the LLC. As a pass through entity, Dr. Smith would normally be taxed on the income personally. Now that Lucky has a charging order against Dr. Smith s LLC, Lucky, not Dr. Smith, would receive the income from the LLC. Lucky gets a K-1 for the taxes on what would have been distributed from the LLC to Dr. Smith. If Dr. Smith were a 100% owner of the LLC interest, Lucky would get a K-1 for all $45,000 that he NEVER received. This is called phantom income (which is income you do not receive but have to pay taxes on anyway).

19 What A Charging Order Means FLP Your Assets Doesn t become partner (ULPA sec 27) Can t touch Assets Gets no FLP voting rights Can t force FLP distributions Charging Order CREDITOR Creditor gets the K-1 (Rev. Ruling ) on phantom income IRS no longer pursuing charging orders

20 Topics not covered in this module Divorce Protection Long Term Care Insurance Estate Taxes Use of Life insurance and annuities Protecting the personal residence Type of tenancies which are poor asset protection tool Community property states Trustee and D&O liability Self settled asset protection trusts QPRT Debt Shields A/R protection Offshore planning

21 There is only one way to help a client reach their asset protection goals.

22 Overview for the Professional Designation: CWPP (Certified Wealth Preservation Planner) The Wealth Preservation Institute 139 N. Whittaker New Buffalo, MI

23 What do Advisors want? To earn more money? To have more knowledge than other advisors? To provide better advice to clients on multiple topics? To be more credible than other advisors? A team of advisors for support and back office when dealing with advanced planning. The ability to market to CPA, Attorneys and physicians through continuing education credit. Are these of interest to you? If so you are a candidate to become an APP or CWPP

24 The WPI and CWPP /APP What is the Wealth Preservation Institute (WPI)? The only educational entity in the country devoted to provide education on advanced planning (asset protection, tax and estate planning) The only entity in the country focusing on topics that apply mainly to the high income/net worth client. Certifying entity for the CWPP designation. The CWPP course is a 24 hour certification program which can be taken all online or in person. The Asset Protection Planner designation is for those simply want to deal with AP (12 hours).

25 Marketing The WPI helps is certified advisors market in two several very unique ways. 1) The ability to become an instant author through a 340+ page ghost book. You can read the table of contents at The WPI will allow CWPP advisors to give CPE continuing education courses on a local level to CPAs and accountants. The WPI has a number of articles that CWPP advisors can use to place in local medical, accounting, legal and other business journals.

26 Topics What topics are covered in the CWPP course? Asset protection (3 hours) -Domestic -Offshore Deferred Compensation (4 hours) -WealthBuilder Annuity; Traditional NQDC and the Leveraged Bonus Plan -Qualified plans/412(i) plans -ESOPs -IRAs Business Planning (6 hours) -Account Receivables (A/R) Leveraging -VEBAs and 419A(f)(6) Plans -Section 79 Plans -Closely Held Insurance Companies -Corporate Structure

27 Continued Estate Planning (8 hours) -Basic - Advanced - Life Insurance -Premium Financed Life Insurance - Medicaid Planning -Qualified Pension Insurance Partnership (Mitigating the 75% Tax Trap) -Charitable planning -Long Term Care Insurance Personal Finance (4 hours) -Annuities -Life Settlements -Reverse Mortgages -Private Annuity Trust

28 Next Seminar? The next in person seminar is in NJ on the th of November. The course can be taken completely online. The 2006 in person seminar schedule will be out in December, Keep checking back to for posting. Group discounts. If you have 5 or more advisors who want to take the course, please contact The WPI for information on course discounts.

29 Questions?